Credit scores can seem like a mystery, but they’re actually quite simple. When it comes to loans, any kind of borrowing involves a lender checking the applicant’s credit score. How the score affects a loan’s interest rate and terms depends on a number of factors. Below is a breakdown of the credit score spectrum and the advantages and disadvantages of different scores. Knowing where your score lies can help when seeking out a loan, to ensure you are getting the best offers available.
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A person’s credit score is one factor a lender uses in assessing how risky they might be as a potential borrower. The most commonly used scoring system in the US is the FICO score, created by the Fair Isaac Corporation. A person’s FICO score is determined by a number of factors. In order of importance, they include: a person’s payment history, their credit utilization ratio, the length of their credit history, their credit mix, and new credit (accounts opened in the past year).
Credit scores range from 300 (very poor) to 850 (perfect). At the top end of the scale, consumers with excellent scores (720 and above) are most likely to qualify for the highest loan amounts. They’re also most likely to receive the lowest interest rates.
In the midrange, borrowers with scores between 660-719 (good) will be offered better-than-average interest rates. According to Experian, the average American credit score in January 2019 fell within this range at a relatively healthy 701. Consumers with “fair” credit scores (620-659), on the other hand, will be offered slightly higher-than-average interest rates. If your score is in this range, it may make sense to try to improve your credit by even 10 points to get lower rates.
People with poor scores (under 620) are often known as subprime borrowers. Depending on how low they grade on the credit score scale, they can expect to pay higher-than-average interest rates as, statistically speaking, they present a higher risk of default. Consumers at the lower end of the spectrum may benefit by (link: /learn/about-creditcards/credit-cards-to-build-up-your-score text: applying for a secured credit card) (backed by a cash deposit equivalent to the credit limit) to try and build up their credit score.
Knowing how the credit score spectrum works makes it easier to compare offers available for different personal finance services, including personal loans. Consumers are able to make better-informed decisions, which can save them money on interest, allow them to pick the best loan terms, and improve their credit score in the long run.
By providing your credit score range, Fiona can save you time and effort by matching you with personal loan offers designed to fit your needs.
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